It is a fundamental principle of law that one cannot give what one doesn’t have. This is sometimes expressed by the Latin maxim “Nemo dat quod non habet” or more commonly “Nemo Dat”. Generally, a person cannot give a better title to goods or other assets than that which he holds. There are a number of limited exceptions, which are set out in other articles.
If a person holds, detains or appropriates property belonging to another (in the sense that the other has a legal interest in it) then that property must be returned, irrespective of whether the person knew of the true position in relation to ownership when he acquired it. The legal interest applies and takes effect, irrespective of notice of it. It holds good against all parties.
Where a person has misappropriated or has wrongly disposed of property in which another has a legal interest, that other may claim against that person for conversion or for monies had and received to his use. However, the claim is personal, and it may be lost if the person concerned is illiquid or insolvent.
Tracing at Common Law
The issue of tracing arises when the original property is substituted by another asset which is purchased with its proceeds. Tracing is a remedy which may be employed to recover assets, their products or substituted assets, into which they have passed.
The importance of tracing lies in the fact that it permits a remedy against the property rather than an individual. This may be critical where the relevant person is no longer available or is unable to satisfy a claim for damages, due to illiquidity or insolvency.
There are different common law and equitable tracing rules. The equitable rules are more flexible, and they take precedence. The common law remedy is narrower in scope but is more absolute in its terms. There is authority for the view that a person may claim a legal interest in the proceeds of the sale itself or in substituted assets.
Where a person disposes of someone else’s property, the true owner may make a claim for conversion or for monies had and received against him. There is authority for the view that he may claim a legal interest in the proceeds of the sale itself or in substituted assets. It appears that the wronged owner may ratify the transfer for this purpose and lay claim to the proceeds by way of legal tracing (the common law doctrine).
Mixing and Identity
The property continues to exist until it is destroyed or used in the making of a new item or is affixed to land or buildings. The mere damaging of goods, even to the extent that they are no longer useful for the purpose is not enough to destroy their existence.
When mixing takes place and cannot be separated, the mixture is owned in common by the owners of the individual parts. Where it can be separated, their original identity remains, subject to proof of which part belongs to whom.The common law does not favour tracing into accounts, even where it is possible to identify the transfer of proceeds into an account.
A person with an equitable interest in goods is not entitled to sue for detinue and conversion. A legal interest, which is one recognised historically at common law, is required to maintain those actions. It is not possible to sue for a declaration of beneficial interest as a remedy in itself.
Equitable Ownership of Property
It is possible for property to be held by a nominee for a beneficiary. This means that the legal owner is a nominee, and the equitable or beneficial ownership; the real economic ownership in the property is held by the legal owner for the beneficiary. Equity treats the beneficial owner as the owner in substance.
The beneficial ownership held under a trust is a proprietary interest. It can be transferred and assigned. A trust of movable property can be established in the same way as a trust over land or real property. In strict terms, writing is not necessary, but it is dersirable in most cases.
Trusts may arise by operation of law. A resulting trust is presumed to arise where a person finances the purchase of an asset, or transfers the property gratuitously into his name and that of another or into the name of another. It is presumed unless the parties are in a close relationship, that a gift is not intended. In some cases there is a presumption of a gift. This may happen with a transfer to a wife, child, spouse or other such person.
A constructive trust may be applied in accordance with principles of equity. A trust may be imposed to avoid undue enrichment in breach of trust and fiduciary duties. The most common instance arises where a person under a fiduciary duty purchases assets with the trust or the beneficiary’s monies or uses it to make an unauthorised profit. He holds the benefit of the property or profit for the trust beneficiary or the party to whom the fiduciary duty is owned.
Where there is a trust or a constructive trust or where one arises, the equitable remedy of tracing is available. As with other equitable remedies, it is subject to being defeated where the asset is acquired by a person who is a bona fide purchaser for value, without notice of the interest concerned.
A pre-existing relationship is usually required. This, in practice, means that the claim is limited to cases where there is a trust or equivalent relationship. The trust may be a formal written trust, or it may be imposed by law in order to avoid injustice; a resulting or constructive trust. A constructive trust may arise where there is a breach of fiduciary duties.
Fiduciaries usually stand in a special relationship to another. They include solicitor and client, banker and client, principal and agent, directors and their company. There are other fiduciary relationships, and the categories are not closed. A trustee under a written trust owes duties to the beneficiaries which encompass but are more thoroughgoing than fiduciary duties.
There is a line of case law that holds that a constructive trust may be employed as a flexible remedy in order to avoid injustice. This is not the predominant view, which limits the constructive trust to a number of predefined categories of case.
Nature of Equitable Tracing Remedy
The equitable right is more flexible than common law tracing but is more limited in scope. The equitable right is lost to a bona fide purchaser for value. The right to trace itself is described as a “mere equity”. It is less than an equitable interest, as litigation must be taken to assert it. The interest is not established until a court order is made.
The holder’s right is voidable. A mere equity yields to a later legal interest acquired by a purchaser for value. A mere equity also yields to a later equitable interest, acquired without notice.
As an equitable remedy, a mere equity will only be available, if it is equitable to allow it. If it would be inequitable to allow the remedy, it will not be granted. If for example, monies have been invested by way of improvement of property, it may not be equitable to allow tracing.
Scope of Equitable Tracing
Equitable tracing is more flexible. However, if there is a loss of identity, such as where the goods have been wrongfully used in manufacturing or in a building, equitable tracing is not available as against an innocent third party. Where, however, the mixing and incorporation has been done by a person with notice of the interest, tracing may be allowed.
Although the position is somewhat uncertain, it may be possible to trace where a third party has knowingly used materials in the manufacture or construction of a new product. It appears that the end product must be improved by the incorporation of the materials.
Equitable tracing is readily granted even where the property is mixed and cannot be identified. This principle applies to bank accounts. A charge may be available over a mixed fund for the value of the assets of the claimant. If the fund has increased in value, the claimant may take the benefit of it.
Claims to Mixed Accounts
Where assets belonging to innocent persons are mixed, they will own a proportionate amount of the mixed fund, Where the person who has mixed the assets owes fiduciary duties to the other, the innocent party will have priority.
The general rule with a bank account is “first-in-first-out”. However, as between the person at fault and an innocent party, this rule will not apply if the innocent party is prejudiced. Where a person mixes trust money with his own monies and then withdraws it, it is presumed that he has withdrawn his own money, unless the contrary is shown.
The courts interpret what assets the fiduciary intended to withdraw. However, the position is presumed in such a way that the interests of the innocent party are not prejudiced.
References and Sources
Modern law of personal property in England and Ireland 1989 Bell
Consumer Law Rights & Regulation 014 Donnelly & White
Commercial Law White 2012 2nd ed
Commercial & Economic Law in Ireland 2011 White
Commercial Law 2015 Forde 3rd ed
Irish Commercial Precedents (Looseleaf)
Commercial & Consumer Law: Annotated Statutes 2000 O’Reilly
Personal Property Law: Text and Materials 2000 Sarah Worthington
Personal Property Law (Clarendon Law Series) 2015 Michael Bridge
The Law of Personal Property 2017 Professor Michael Bridge and Prof. Louise Gullifer
The Principles of Personal Property Law 2017 Duncan Sheehan
Crossley Vaines on Personal Property 1967 by J C Vaines
The Law of Bills of Sale 2017 James Weir
Palmer on Bailment 2009 Norman Palmer
The Reform of UK Personal Property Security Law: Comparative Perspectives 2012 John de Lacy
The Law of Personal Property Security 2007 Hugh Beale and Michael Bridge